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What is the value of solar in Arizona?

John David Baldwin

February 3, 2017

Net metering has come under attack across the country. The latest battle took place in Arizona. In December of last year, the Arizona Corporation Commission (ACC) voted to end net metering for new solar customers and to establish value of solar (VOS) criteria. This would determine the total value that solar generation provides to the electric grid. The ACC’s decision shows the value of solar depends on who is doing the measuring.

The controversy began more than two years ago when Arizona’s three investor-owned utilities asked regulators for rate increases on solar customers. As has been the case in other states, the utilities complained about solar users “cost shifting” the expenses of maintaining the grid to non-solar users.

The utility’s cost-shift calculations are based upon a narrow standard: the cost-of-service methodology. Solar advocates protested that this methodology doesn’t work for distributed generation (DG). Any accurate assessment of solar’s value, they claimed, would have to take into account its benefits, not just its costs. In October 2015, the ACC moved the debate out of an individual rate case into a value of solar proceeding.

Determining the value of solar for DG is theoretically easy. On the simplest level, it’s a matter of analyzing costs and benefits and using this data to come up with a fixed monetary figure per unit of power generated. But of course, it isn’t that simple. What exactly, one might ask, should count as a cost, what should count as a benefit, what timeframe are we talking about – and who gets to make these decisions in the first place?

The parameters for how this value is calculated change drastically depending on who is making these determinations. To the utilities, generally, the only thing that matters is the data in its cost of service studies (COSS). These analyze, as one executive said, “all the costs the utility incurs in providing power to the customer.” Solar advocates point out, however, that any determination of the value of solar is meaningless without considering environmental and societal benefits and impacts to other ratepayers. The timeframe also matters, as costs and benefits change over time.

The VOS proceeding was particularly chaotic as it coincided with a number of highly-publicized controversies affecting the ACC. These include accusations of the use of “dark money” – undisclosed political contributions – in commission election campaigns, and an FBI investigation of a former commissioner. These controversies demonstrate how politicized the regulation of energy in Arizona has become. Unlike many other states, Arizona’s commissioners are elected, not appointed.

The VOS proceeding opened by the commission in late 2015 necessitated a ruling from an administrative judge, Teena Jibilian, concerning the evidence presented in the ensuing hearings. Such opinions are not legally binding, but are usually very influential on the commission. The judge issued a Recommended Opinion and Order (ROO) to the commission last October. The ROO recommended the total elimination of net metering for new customers. She proposed that existing customers, and those who had submitted interconnection applications prior to any final order, be “fully grandfathered” into the new rate structure. This would allow them to retain net metering with no plan changes for 20 years. According to this article, all parties to the proceedings who were interviewed, including the utilities, applauded this move.

The ROO recommended setting the energy compensation rate using a solar valuation methodology, rather than a cost-of-service methodology preferred by the utilities. Jibilian offered two alternatives: a) an Avoided Cost methodology, which uses five-year forecasting to evaluate eligible costs and values; and b) a Resource Comparison Proxy (RCP) methodology, which would use a five-year rolling average of a utility’s solar power purchase agreements (PPAs), as well as solar projects owned by the utility itself, as a proxy for the valuation of distributed solar exports. The ROO allowed environmental benefits and costs of DG to be included in an avoided cost analysis, but rejected alleged societal and economic development benefits as “speculative and inappropriate for ratemaking purposes.”

In December, the ACC held 30 hours of hearings over two days. Solar advocates insist that their input went largely ignored. In the afternoon after the open meetings, Commission Chairman Doug Little had his staff approach the parties to the proceedings for a discussion to suggest “tweaks” to the recommended proposal. However, Little claims that the suggestions of solar advocates at that time were too ambitious to be considered “tweaks,” and had to be rejected.

The vote of the commission was 4-1 in favor of the ROO (with amendments), with one commissioner dissenting. The ruling eliminated net metering, except for grandfathered solar households whose rates will be guaranteed for 20 years. Export credits for new solar customers will be based on short-term valuation methods, as suggested in the ROO. Customers who interconnect after the new standard is applied will have their rates guaranteed for only up to ten years. Utilities can opt for either the RCP or Avoided Costs methodology, or combine the two. The ruling does not specify how that combination might be accomplished. The decision establishes rooftop solar customers as a separate rate class, and eliminates “netting” or “banking” of solar power credits to offset usage in later months, as had occurred under the old rules.

“We were disappointed with the Value of Solar decision,” said Briana Kobor, Program Director, DG Regulatory Policy at the solar advocacy organization Vote Solar. “Throughout the proceeding, Vote Solar advocated for a more robust valuation of solar, an inclusion of all of the costs and benefits that homegrown solar provides to the grid, and a view of the impact of solar over the full life of the system.” Kobor agreed with many critics of the decision that the five-year time frame suggested for determining the value of solar should have been changed to 20 or 25 years.

“Utility systems are a network of long-lived assets,” Kobor said. “Distributed solar has an expected lifetime in excess of 20-25 years. Limiting the analysis to a five-year time frame does not allow for a full understanding of the impact that rooftop solar will have on the grid and results in an undervaluing of the resource.” Kobor notes that third-party studies have consistently found the value of solar to be greater than the retail rate offered by net metering.

Solar advocates did not accept this ruling of the ACC. One of these, the Alliance for Solar Choice (TASC), filed for a rehearing in January. It claims the commission’s ruling violated the “collaborative process” of its own rulemaking procedures, “depriving the parties and the public of the protections inherent in the Rulemaking process.” In essence, TASC is arguing the VOS proceeding that originated in 2015 was designed simply to determine the VOS and not to create new policy regarding rates.

Their filing argues: “Instead of engaging solely in the investigation for which the docket was opened, the Commission's actions actually resulted in the adoption of new rules governing net metering” and other policies. Those actions, according to TASC, were not in compliance with the Arizona Administrative Procedural Act (APA) and are therefore null and void.

The ACC, however, will now proceed collecting utility data to determine the value of the RCP based on large-scale solar pricing in each utility territory. Unless TASC’s requested rehearing occurs, and the commission finds in favor of TASC, the commission will apply the results to each rate case initiated by the utilities, probably by the middle of 2017.